Time to diversify
In the eyes of many investors, bonds and equities enjoy a domestic relationship much like the man and woman in a traditional Alpine weather house…
It’s often assumed that stock and bond values will not move together.
This, however, is not always true. If we look at the correlation of returns for the S&P 500 stock index and US Treasury bonds, there have been only two periods of negative correlation since the Second World War: 1955-65 and 2000-15. So the anomaly is when stocks and bonds move in opposite directions, not the same direction.
This underlines the importance of diversification.
Portfolios can be bolstered by investing in alternative assets such as property and infrastructure. Some of these asset classes can offer a low correlation with stocks or bonds, while still providing the growth that investors need.
Infrastructure investments benefit from cash-flow generating assets – such as wind and solar panel farms – rather than the vagaries of the stock market. This lack of correlation between different asset classes can also help reduces the volatility of the overall portfolio, because the different asset classes tend to move in different directions from each other.
Alternative investments provide access to alternative drivers of growth, can reduce portfolio volatility and protect against extreme market events.
Corporate bonds play an important role in the diversification of your portfolio by providing stability, offsetting risk and generating income.
Equity markets are volatile however a diversified approach can provide a solution to the risks inherent in equity investing.